SINGAPORE (June 26): Singapore’s economy is seen to undergo a “sustained” rebound and that bodes well for certain cyclical recovery plays in key sectors, says Morgan Stanley analysts Wilson Ng and Derek Chang.
The current Q2 is likely to be the trough quarter with a contraction of 15%, leading to a full-year decline of 6.5%. However, in line with a global recovery that is already underway, Singapore’s 2021 GDP is forecast to reach 7.8%, says Morgan Stanley.
“The initial onset of a recession historically marks an inflection point for stocks, and we believe a sustained rebound is underway, as the market looks past the current economic weakness and shifts focus instead to an imminent V-shaped recovery in the global economy,” the US bank adds. Singapore, with its safe haven status amid geopolitical and economic uncertainties of the region, is likely to see well-supported inflows of investments.
“At the current phase of economic recovery, we favour cyclical sectors that historically have outperformed 6–12 months into past recessions,” says Morgan Stanley. Five of the favoured stocks are United Overseas Bank (UOB), City Developments (CDL), Wilmar International, Ascendas REIT (AREIT) and Netlink Trust generally fit this bill and have decent dividend yields to boot.
The first pick, UOB, is one of the three main banks in Singapore and has assets of around $400 billion. Beyond the core Singapore market, UOB also has “good positions” in the emerging Asean region and among Chinese corporates and should benefit from growing links between these markets. Morgan Stanley analyst Nick Lord, who covers UOB, prefers Singapore banks over Hong Kong banks, and UOB is his top pick in the space. Among the banks, Lord sees UOB as having the most defensive business mix; its strong capital ratios and more than 50% cash payout should also support the share price.
Next, property giant City Developments. It has a leading share of private home sales in Singapore, and will likely benefit the most from any positive surprises in the Singapore housing market. Despite the recession, Ng believes the contraction in homes prices and volume this year will likely be milder than generally expected. Households are not over-binged on debt, and judging from what happened in other markets such as China, that had emerged earlier than Singapore from lockdowns, they have enjoyed a swift recovery in housing sales. There is weakness from its hotel assets, which are suffering from global travel restrictions. At current levels, CDL’s valuation is at near-Global Financial Crisis levels and thus appears to have sufficiently discounted the hit. According to Ng, the company has potential for capital recycling which will be accretive to its net asset value and that is further upside for this stock.
Morgan Stanley likes AREIT as well. And it is not because AREIT is the largest REIT in Singapore by market capitalisation, it has a leading share renting space in business parks and hi-spec industrial space in Singapore. Demand for space is coming from the tech and pharmaceutical sectors. There are other REITs with more attractive dividend growth profiles, but AREIT scores for its consistency in delivering stable and growing dividends. Given its market cap, AREIT will attract a disproportionately larger share of both active and passive fund inflows into the Singapore REIT sector.
The fourth stock favoured by Morgan Stanley is leading agribusiness group Wilmar International. Besides palm oil plantations, the company is in downstream activities such as oilseed crushing, edible oils refining, sugar milling and refining, and manufacturing of consumer products as well. Wilmar derived half its 2019 revenue from China, and according to Morgan Stanley analyst Divya Gangahar, consumer products, which accounts for between 50% and 60% of its earnings in China, is a growth driver over the medium term. Wilmar’s share price is set to enjoy some lift from the impending separate IPO of its China-based subsidiary, Yihai Kerry Arawana Holdings. On June 23, Wilmar said an updated draft IPO has been filed.
The fifth stock picked is Netlink Trust, which is the only provider of last-mile fibre infrastructure to residential premises in Singapore. Various internet service providers ride on its lines. Morgan Stanley’s Mark Goodridge describes fibre infrastructure as critical to the deployment of smart cities, and it is arguably the “best part” of the value chain of the telecommunications industry. Goodridge likes Netlink for its “annuity-style” earnings, thanks to a sound regulatory framework. He believes the trust will likely sustain high dividends and positive dividend growth backed by a strong balance sheet.
On the other hand, there is a list of stocks Morgan Stanley recommends investors to avoid. For one, while economies reopen, the resumption of cross-border travel to pre-Covid levels will likely only occur, at best, months after a vaccine is made widely available. “Even after governments lift travel restrictions, we think travellers will take a cautious approach to resuming cross-border movements. We would avoid stocks dependent on travel flows, including hotel owner CDL Hospitality Trusts and casino operator Genting Singapore, which also faces growing competition within the region from other resorts.”
Another stock facing stiffer competition, and therefore, to be avoided, is StarHub, which is facing not just price competition from new competitor TPG but also changing industry dynamics where cable TV viewing is dropping steadily. Morgan Stanley is underweight on Singapore Exchange as well, for its subdued market share of new listings and more recently, losing 37 MSCI futures and options contracts to Hong Kong Exchange and Clearing.
